Question

A granary purchased tractor for over-the-road hauling for $90,000. It is expected to be of use to the company for 6 years, after which it will be salvaged for $4,000 but was sold at $6,000 at the end of 4 years. During the period of operation it generated an average savings of $170,000, incurring an annual driver costs of $70,000 and annual operating and maintenance cost of $63,000 every year. The granary is considering multiple depreciation methods and has a marginal tax rate of 40 percent, and a MARR of 10 percent after taxes. Answer the following 3 questions based on the above information.

1-Calculate the after tax present worth of the tractor considering depreciation deduction of the tractor’s life using SLN allowances.
2-Calculate the after tax present worth of the tractor considering depreciation deduction of the tractor’s life using MACRS-GDS allowances. (MACRS class has to be determined)
3-Calculate the after tax present worth present worth of the tractor considering depreciation deduction of the tractor’s life using Double Declining Depretiation allowances.

Answer 1

To calculate the after tax present worth of the tractor, we need to determine the depreciation expense using different depreciation methods and then use a formula to calculate the present worth after taxes and the desired rate of return. For the SLN method, we calculate the annual depreciation expense using the cost and salvage value. For the MACRS-GDS method, we determine the MACRS class and use the MACRS-GDS tables. For the DDD method, we calculate the annual depreciation expense using the depreciation rate.

Step-by-step explanation:

To calculate the after tax present worth of the tractor using the Straight Line (SLN) depreciation method, we need to calculate the depreciation expense per year. The cost of the tractor is $90,000 and the salvage value is $4,000 after 6 years. So the annual depreciation expense is ($90,000 - $4,000) / 6 = $14,333.33. The after tax present worth can be calculated using the formula: Present Worth = [Annual Savings - (Annual Depreciation Expense × (1 - Tax Rate))] / (1 + MARR)

For the MACRS-GDS depreciation method, we need to determine the asset's MACRS class. Since the tractor's useful life is 6 years, it falls under the 5-year class. The depreciation expense for each year can be obtained from the MACRS-GDS depreciation tables. The after tax present worth can be calculated using the same formula as above.

For the Double Declining Depreciation (DDD) method, we need to determine the depreciation rate. The depreciation rate per year is 2 / Useful Life = 2 / 6 = 33.33%. The annual depreciation expense for each year can be calculated by multiplying the depreciation rate by the initial cost. The after tax present worth can be calculated using the formula above.